Crude Oil Technical Analysis: WTI Falling Wedge Can Bulls Force a Reversal

Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Similar to other chart patterns in technical analysis, the Wedge Patterns come with their own set of advantages and limitations. This target is in line with our prediction that the market will consolidate after the breakout. Therefore, in comparison to many other price chart types, identifying the upper and the lower trendlines, and hence the Wedges, becomes much simpler when leveraging a Candlestick Chart. As the pattern develops further, a flurry of bullish traders continue to enter the market, increasing the pressure on the short-sellers of the security even further.

As the trend lines get closer to convergence, a violent sell-off forms collapsing the price through the lower trend line. A rising wedge is generally a bearish signal as it indicates a possible reversal during an up-trend. Rising wedge patterns indicate the likelihood of falling prices after a breakout through the lower trend line. In a falling wedge, when there is a sustained decline in the price of security, at a certain time, the lines drawn above and below the wedge chart will convergence. The convergence signifies a reversal from a bearish pattern with points that a bullish pattern will commence. When this happens, the reversal would cause an increase in the price trend.

Technical Analysis

The falling wedge pattern is a useful pattern that signals future bullish momentum. This article provides a technical approach to trading the falling wedge, using forex and gold examples, and highlights key points to keep in mind when trading this pattern. The uptrend remains intact if the asset price remains above the trend; a break or fall below indicates a weakening net demand and a potential change. Chart patterns are crucial to every caliber of investor as they show market trends and predict movement.

technical analysis falling wedge

That being said, on rare occasions, a Rising Wedge pattern can also appear on the price chart of a security after a prevailing downtrend. Therefore, a Rising Wedge Pattern can either be a bearish reversal or a bearish continuation chart pattern. The Wedge Patterns, or Wedges, are chart patterns that last 10 to 50 trading sessions and that frequently appear on the price chart of a security. In these patterns, the highs and lows of price converge to move towards each other to form a triangular-shaped structure.

Advantages of Trading Rising and Falling Wedges

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technical analysis falling wedge

Both scenarios contain different market conditions which must be taken into consideration. Rising wedges have a relatively low risk/high reward ratio and, as a result, they are a favorite among professional technical traders. There are many false patterns or patterns in disguise that may come off as rising wedges that investors be wary of. The only way to differentiate a true rising wedge from a false one is by finding price/volume divergences and to make sure that the failure is still under the 50% Fibonacci retrace. A wedge pattern is commonly formed when securities, stocks and assets are being traded in the market.

What is a falling wedge?

The price action trades higher, however the buyers lose the momentum at one point and the bears take temporary control over the price action. One of the key features of the falling wedge pattern is the volume, which decreases as the channel converges. Following the consolidation of the energy within the channel, the buyers are able to shift the balance to their advantage and launch the price action higher. This article explains the structure of a falling wedge formation, its importance as well as technical approach to trading this pattern. A double bottom represents the letter W, indicating two unsuccessful attempts at the price to break through the support level. The falling wedge pattern is characterized by a chart pattern which forms when the market makes lower lows and lower highs with a contracting range.

technical analysis falling wedge

So, let us jump straight into the three market psychology phases behind the development of a Falling Wedge Pattern. Breakout is the point at which the reversal is signaled and it begins to occur. For the best results, you should use both of these above-stated methods in conjunction with each other. Now, without further ado, let us briefly discuss both these methods for identifying Wedges. Now that we have briefly discussed the key characteristics that would generally apply to both types of the Wedge Pattern, let us discuss both variations of this pattern in some more detail.

WTI Crude Oil Monthly Price Chart

Additionally, this breakout has a grounding, and it is advisable to sell or short sell as this breakout occurs. But, just as with any other chart patterns, false breakouts frequently occur when trading Wedges. Therefore, when trading breakouts with the Wedge Patterns, the accuracy of your trades can be significantly improved with a breakout confirmation signal from a complementary trading tool. Continuation Candlestick Patterns form one such complementary tool that you can leverage for this purpose.

  • Using the wedge, price patterns are drawn on a chart to form an arrow, major movements and trends in prices are represented using a wedge.
  • In the end, the bears sweep all buying orders of the bulls away and break the support level through top-down, gathering Stop Losses and pending Sell orders.
  • Falling wedge patterns can be pretty rewarding, but the most crucial is identifying the pattern correctly.
  • The second indication is to look for how far the retrace has advanced from the beginning of the downtrend.
  • It is characterized by two converging trendlines, the upper trendline and the lower trendline.

From the four hour chart below, we can see that bulls haven’t exactly taken control of matters yet. That 85.90 level came into play last Tuesday, so about a week after I had written the prior technical article on WTI. At the very least, this illustrates a clean example of prior price action resistance-turned-support. The chart below shows the rising wedge on this big timeframe and a quick count reveals the wedge took ninety-four weeks until completion. FCX provides a textbook example of a falling wedge at the end of a long downtrend.

Determining Take Profit Level

A third wave is then formed thereafter but prices fall less and less in contact with the resistance. The movement then has almost no selling force, which brings about a bullish reversal. To conclude, a Rising Wedge is a bearish reversal or a bearish continuation chart pattern that appears on a security’s price chart after a high momentum sustained price trend. It is characterized by two converging trendlines, the upper trendline and the lower trendline. Additionally, for a Rising Wedge Pattern, the slope and the momentum of the upper trendline is less than that of the lower trendline. Some studies suggest that a wedge pattern will breakout towards a reversal more often than two-thirds of the time, with a falling wedge being a more reliable indicator than a rising wedge.

Traders ought to know the differences between the rising and falling wedge patterns in order to identify and trade them effectively. When a security’s price has been falling over time, a wedge pattern can occur just as the trend makes its final downward move. The trend lines drawn above the highs and below the lows on the price chart pattern can converge as the price slide loses momentum and buyers step in to slow the rate of decline. Before the lines converge, the price may breakout above the upper trend line.

During the development of the Wedge Pattern, the upper and the lower trendlines begin to contract towards each other. As time progresses, both these trendlines move in the same direction, but at a different pace. With both, the Rising and the Falling Wedges, the pattern completion is marked by a breakout that occurs in the direction of the trendline with a higher slope. During the formation of Wedges, irrespective of the type, the trading volume declines as the price progresses through the pattern. A chart formation is a recognizable pattern that occurs on a financial chart.

How Reliable Are Rising Wedges?

Rising Wedge – Again, with a Rising Wedge Pattern, you can set your take profit target at the price point that represents the start of the Rising Wedge on the lower trendline. We are predicting here as well that the market will consolidate after the breakout. The Wedge Pattern Breakout Strategy is a trading strategy that involves making a buy or sell decision after the price breaks out of the Wedge Pattern. When you are trading a Falling Wedge, the breakout will result in an uptrend, and the reverse will be true when trading a Rising Wedge Pattern. In situations such as these, it is advisable to buy the security that you are trading.

Investors are able to derive cogent market insights through the technical analysis depicted on a wedge. During this development phase of the pattern, there is substantial trading activity in the market, indicating a strong selling or buying interest in the asset. High level, the Rising Wedge formation is the result of three broad market psychology phases.

This is because this indicator measures the changes in volume relative to the direction of the price change. Therefore, it will show you both the direction and the magnitude of the volume change, which are both crucial in identifying the Wedge Patterns. In a Rising Wedge Pattern, this trendline has a higher slope than the upper trendline. Moreover, with a Rising Wedge Pattern, it is this trendline through which the price breaks once the pattern construction is complete. The Rising and the Falling Wedges are both characterized by several structural components. You can leverage these structural components to identify and to confirm Wedges on the price chart of a security.

Moreover, the trading activity in the market considerably reduces during this phase. Furthermore, in the case of a prevalent uptrend, short-sellers also begin to rush to the market at this stage. In most trading scenarios, the Wedge Pattern primarily indicates to traders that a reversal in the direction of the price is upcoming. This allows the traders to accordingly pivot their trading plan and strategies. That being said, there are a few situations where the Wedge Pattern can also be used as a sign of potential trend continuation. To delve deeper into the Wedge Pattern, how it works, how it can be identified, and how to use it in a trading strategy, read on.

Join thousands of traders who choose a mobile-first broker for trading the markets. Going down to the daily chart in crude oil and a falling wedge becomes prominent. Resistance remains at the more aggressive trendline, and this illustrates greater aggression from bears when price is at or near resistance. Support, on the other hand, shows a weaker-angled trendline, and this often appears when there’s a major spot of support on the way. That major spot of support could make it more difficult for fresh bearish exposure to trigger . That is, most of the times, as there is one instance that calls for a rising wedge to have a bullish outcome and a falling one to have bearish follow-through price action.

A wedge is a price pattern marked by converging trend lines on a price chart. The two trend lines are drawn to connect the respective highs and lows of a price series over the course of 10 to 50 periods. The lines show that the highs and the lows are either rising or falling at differing rates, giving the appearance of a wedge as the lines approach a convergence. Wedge what does a falling wedge indicate shaped trend lines are considered useful indicators of a potential reversal in price action by technical analysts. To identify a falling wedge pattern, draw lines linking lower highs and lower lows using a trendline. The trading volume should lessen during the falling wedge formation as the price has entered a consolidation stage before the bullish breakout.

Hence, this type of wedge pattern would typically represent a bearish reversal. An ascending triangle is a chart pattern used in technical analysis created by a horizontal and rising trendline. The pattern is considered a continuation pattern, with the breakout from the pattern typically occurring in the direction of the overall trend.